IQE plc ($IQE)

Good morning, and welcome to IQE's full-year 2025 results presentation. I will now hand over to Chief Executive Officer, Jutta Meier. Please go ahead.

Thank you, and welcome to IQE's full-year 2025 results. I'm so excited to be joining you today, and would like to extend a warm welcome to those of you who have been following IQE for some time and the many of you who are new to our story. I'm very conscious that, it has been some time since you have heard much from IQE. That is because the strategic review meant that we are very limited as to what we could say to the market and also what some of our research analysts can write about us. I'm very pleased that period is now behind us. And you will have seen the news this morning about our fundraising transaction officially closing. It's important, because of what this investment from MACOM and other investors signifies. What it says about their confidence in IQE, our strategy, our market position, our leading technology and the strength of IQE's customer relationships. It's also about their confidence in IQE's future. So this feels like the perfect time for me to take a step back and set out for you why IQE and why now. While what IQE does might seem quite niche and removed from you every day. I want you to understand this is far from the case. This slide sets out some of the structural demand drivers that are shaping our industry and in turn, directly creating opportunities for our business. The topics on this page are dominating the news headlines you read, the technology you use and our global economies. I'll take each of these in turn, going around the wheel clockwise, starting with geopolitics. International governments recognize the rising importance of these technologies across all areas of life. And that is why we are seeing so much focus on efforts to establish sovereign supply chains for the semiconductors necessary to support economic and technological growth. IQE's manufacturing facilities in the U.S.A., Europe and Taiwan means that we have global production capabilities. And we are engaged with governments across all of these geographies. Moving on around the wheel. One of the key reasons why sovereignty has become such a focus in the importance of semiconductors to the most modern defense technology, especially at a time when spending in this area is growing. IQE has a long-standing expertise in supplying to aerospace and defense customers. It is also well established that the technology breakthroughs in sectors like aerospace and defense, eventually feed into other commercial areas. One such area is the space sector, where developments previously made by defense customers are feeding into commercial uses for satellites, data centers and power generation in the form of space-based solar arrays, as well as areas as diverse as pharma, mining and tourism. Then on to the AI super cycle. We all understand the importance of the impact that AI is already having on the world, and this will continue to accelerate. This is not only fueling increasing demand for faster and more efficient semiconductors, but changing the way that the industry thinks about value. Compound semiconductors are critical for AI infrastructure and IQE's complete suite of materials underpins the AI ecosystem, which we will discuss further later. Consequence of this AI high-performance computing demand has also been that the packaging of chips, which we highlight at the top left of the slide, has now shifted from being seen as a supporting process to a core driver of performance. IQE plays an upstream, but strategically important role in the semiconductor packaging ecosystem, particularly in advanced photonics, heterogeneous integration and AI optical interconnects. You've heard about compound semiconductors and the industry exploding around us. Now, what does that mean for IQE and how we are benefiting from that? When I'm introducing IQE to people, I'd like to say that we are the most important part of the global semiconductor supply chains that some people have never heard of. And we're working hard to change that. To start with the fundamentals of our business that I said we would talk about, IQE is the world's leading epitaxy actually wafer supplier, and has a number of unique strengths that set us apart. Our expertise and reputation in the market is built on our more than 35 years' experience, having been in operations since 1988. That has allowed us to build the broadest product portfolio in the sector, serving a global customer base across the highest growth technology segments. I spent over 25 years in the semiconductor industry, mainly in Silicon Valley. And I have to tell you, when I first got under the hood of IQE's technology, I was absolutely blown away. We operate in the most cutting-edge segments and the world's most important companies rely on us from leading consumer brands to defense customers and AI innovators. Another key differentiator is our global footprint. We are the only pure-play epitaxy provider with manufacturing facilities on 3 continents, meaning we are able to offer our customers flexibility, scalability and supply security. We are pleased that following the completion of the strategic review, we have retained this multi-country capability, with our sites in the U.K., U.S. and Taiwan. Each of our sites has its own technology focus. And in all of our sites, we have the capacity to scale production to meet rising customer demand, without the need for significant further investment. Taken together, we have a unique platform to allow us to capture global opportunities across the market. Understand how we are placed to capture all these opportunities, I'd like to take a moment to zoom in on where we sit on the global semiconductor supply chain. As the world's only pure-play epitaxy foundry, IQE has a unique and critical position in the global value chain for semiconductors. I'm not going to get too technical at this point. I will leave that for another time for our CTO, Rodney. But at the core of the process, we take the base substrates and use our epitaxy process to grow atomic layers on the substrate. Why do we do that? The compound semiconductors that we make through this process fulfill a need where silicon semis aren't fast, efficient or powerful enough. These wafers then move through the value chain through foundries and design before ending up in a wide variety of end applications. Let's take a minute to discuss some of those end applications. I'm not going to go into each one of these in turn. But what should be clear, when you have a look at this slide is that we are playing in the biggest and most important market segments in the world. All of this is underpinned by our market-leading material systems, spanning across indium phosphide, gallium nitride, gallium arsenide, and gallium antimonide. Our compound semiconductor materials possess advanced properties that set them apart from incumbent silicon technology. And that is increasingly important as we approach the limits of Moore's Law. People often ask me, who our competitors are, and I always say that, this is not a simple answer, because no one else can do quite what we do. While some operators are doing some of what we do in single sites, no one else is able to work across such broad material portfolio as IQE, especially when combined with our global footprint. To focus in on the end market that is getting the most attention at the moment, let's have a look at our offering across the AI and data center markets. Our exposure to AI extends across a number of key materials and capabilities. But at the core, enables ultra-fast data communications, energy-efficient electronics and advanced sensing capabilities. Looking at indium phosphide in particular, this is a crucial enabler of the ultrafast optical and wireless data communications that data centers rely on. In the last year, we have seen market demand from these indium phosphide solutions significantly increased due to the exponential growth in AI. The fact that, IQE has not just years but decades of experience making indium phosphide wafers to the highest standards gives us a unique advantage in the market. It means, we are best placed to work with customers to deliver a high-quality supply. But the nature of the supply they are demanding is very much in the here and now. This is a live market opportunity. We also have the ability to flex assets and convert existing tooling to support indium phosphide growth, but this would need to be tied to concrete customer commitments. While indium phosphide might be the current buzzword, it is just one part of the broader ecosystem. You can see that our gallium nitride and gallium arsenide technologies are also hugely relevant here. And it's another demonstration of the power of our diversified technology portfolio. Now, I'd like to turn to a summary of our fiscal year 2025 results. The story of 2025, was one of accelerating momentum and improving market conditions in the second half. Plainly speaking, the first half of the year wasn't where we wanted to be. Revenues were impacted by global macroeconomic uncertainty around tariffs, continued softness in the wireless handset market that led to customer inventory builds and delays to military and defense funding. However, these issues eased in the second half of the year. By the end of the year, we saw significant improvements, which have continued into 2026. Most notably, the wireless market improved by the fourth quarter, leading to depletion of these customer inventory buildups and the release of budget for U.S. defense projects. The rising global demand for AI compute and data center deployments also created opportunities for us and contributed to the improved second half performance. Again, we see this as a long-term trend that will benefit the business throughout 2026 and beyond, creating opportunities across indium phosphide and GaN in particular. Group revenue for the year was GBP 97.3 million, comprised across our Photonics and Wireless business units. This is a legacy reporting structure that we are currently evaluating as you'll appreciate that this does not fully capture the complexities of the business as we covered in the previous slides. In Photonics, revenue rose 15% to GBP 57.1 million. This was driven by continued growth in AI and data center-related markets that we've just discussed, as well as the funding releases for certain U.S. military and defense programs. In Wireless, revenue decreased by 40% to GBP 40.1 million. This reflected the uncertain macroeconomic conditions in the first half of the year and softness in mobile handset demand with some end customer requirements met from existing inventory. What I would highlight about last year's performance is that, it shows the opportunities present in IQE's broad portfolio and the resilience it gives us in uncertain times, where softness in one market can be offset by strength in others. Our adjusted EBITDA results of GBP 3.2 million was a direct reflection of the low utilization of our manufacturing footprint. However, our existing asset base has ample capacity to support significant production increases that will be needed to meet higher demand without requiring material capacity expansions. This will directly benefit not just our EBITDA's performance, but also future cash flows. The rise in adjusted operating cash flow from the year reflected a working capital inflow of GBP 11.2 million. We ended the year with cash and cash equivalents of GBP 15.7 million and an adjusted net debt of GBP 31.5 million. It is important to stress, however, that after the year-end, the GBP 81 million fund raise from MACOM and other key partners transforms our capital position. We will use the funds to fully repay our revolving credit facility with HSBC Bank, leaving us without bank debt. Following this, IQE will receive net cash inflows of GBP 27.9 million. I will touch on the impact of this in more detail in a couple of slides. Even though, our financial performance was not what we would have hoped for, we still made good strategic progress throughout the year in all 4 of our core markets. Connect is benefiting from the rise in demand from AI-driven hyperscale data centers, as well as the improvement in the mobile handset market that we saw in the second half. Our leading position on indium phosphide positions us well for the future, as data centers demand continues to grow. In sense, we have continued to develop our advanced sensing capabilities, which have applications across end markets, including consumer mobile and aerospace and defense. In power, we see rising demand for our GaN solutions driven by data centers, aerospace and defense and space applications. Finally, in display, we continue to develop our microLED technology, which will be vital to future consumer technology, including AR/VR displays, and we are seeing good engagements with key customers. All of this is very encouraging and gives me confidence that we have the right strategy playing into the most exciting markets in global technology. We've spoken a lot already about the external factors that impacted performance during the year. And I think, it's important to focus on what actions we have taken and continue to take in order to put IQE in the best position possible to succeed. Since I joined the business, my top priority has been in ensuring that the business operates in as an efficient and fiscally responsible way as possible. This was especially important throughout the strategic review and during more difficult market conditions during the first half. But this is something that I'm committed to maintaining moving forward as well. On operational level, we have undertaken a program of portfolio optimization that is centered on ensuring that we are getting the most value out of our assets, focusing on our core customers and technologies to ensure we are most effectively utilizing our capacity. We've also implemented operational improvements across all of our sites that have made our manufacturing processes more efficient and high yielding. We also completed the exit from our silicon site in South Wales in the second half of the year as part of our site optimization program. All of these measures have helped to make IQE a more efficient and effective business. And we will continue to find areas for improvement on an ongoing basis to benefit the business moving forward. After the end of the 2025 reporting year in April, we were very pleased to announce the conclusion of our strategic review with a strategic investment from MACOM and other existing shareholders. When we set out with the strategic review, the aim was to reduce debt, strengthen the balance sheet, and create the capacity to invest. We achieved that objective. And we are now incredibly well positioned to invest for profitable growth, service our customers, and maximize value for the shareholders. The GBP 81 million of proceeds consists of GBP 45 million from MACOM in the form of GBP 30 million cash and GBP 15 million of convertible loan notes, with the remainder coming from existing shareholders. These proceeds will be used to pay off our existing revolving credit facility with HSBC, to redeem the existing loan notes and to strengthen our balance sheet. As discussed on the previous slide, this will clear our bank debt and results in cash after receipt of funds and repayment of RCF of around GBP 27.9 million. As I mentioned earlier, we are also very pleased that, this has enabled us to retain our global footprint, which gives us a competitive advantage and enables us to continue to serve our international customer base. We have also signed long-term strategic agreements with MACOM, which will provide security, revenue visibility and stability for IQE and further strengthens our relationship with a Tier 1 well-established customer. As we announced at the time, following the conclusion of the strategic review, Mark Cubitt has returned to the role of Non-Executive Chair; and Harmesh Suniara stepped down from the Board as representative of Lombard Odier, who do not intend to appoint an alternate representative. IQE's Board has also approved the appointment nominations of Robert Dennehy, MACOM's Chief Operating Officer; and David O'Carroll, MACOM's Vice President as Non-Executive Directors, subject to completion of customary Nomad due diligence. We also intend to appoint a permanent CFO in due course. This is an incredibly exciting development for the business, which transforms our capital structure and put us in a much stronger financial position to take advantage of the global opportunities I have spoken about. Looking to the current financial year, I'm pleased to say that the positive momentum from second half 2025 has continued. Trading in Q1 2026 was in line with management expectations, reflecting strong demand across all of our core segments. In particular, we are seeing accelerated demand for our indium phosphide photonic products related to AI compute and data center deployments, as well as VCSEL and wireless products supporting the consumer smartphone industry. Alongside ongoing strength in aerospace and defense industries, this growth trajectory is expected to continue throughout 2026. We have strong order book visibility going into the second half. And we expect full year revenue growth for 2026 exceeding 20% year-on-year. This is expected to result in high single-digit to low double-digit adjusted EBITDA position. So why IQE? Why now? Well, IQE is in a very different position today with the strategic review completed and all the work we have done to transform the company to this point. The period of uncertainty is behind us. And we now have the financial firepower to maximize the opportunities ahead of us. Our strategic importance in the semiconductor supply chain and our leading technology capabilities mean that we are well positioned to take advantage of the increasing demand in our end markets. And this is all now being recognized and acknowledged by players across the industry. And I'm pleased by the levels of customer support we have had for the transaction. As I've emphasized throughout this presentation, hyperscale AI and data centers represent a massive opportunity for us across our materials portfolio, but especially in relation to indium phosphide. We have been a leader in the technology for many years. And this means that, we are in prime position to meet the demand for our vital optical photonics products now. We remain focused on 2 things: firstly, delivering against our core fundamentals that I've outlined earlier. And secondly, ensuring that we continue to provide our customers with industry-leading technology and service. I would like to close by thanking all of my colleagues at IQE for their hard work over the year. And I'm excited for what I know we can achieve together this year. With that, I'd like to invite any questions from the webcast.

[Operator Instructions] Our first question is from John Karidis from Deutsche Bank.

So first of all, Jutta, warm congratulations to you and the entire team for all that you've achieved. I have 3 questions, please. The first one is, is there anything like a standstill agreement, for example, preventing MACOM from increasing its stake in IQE? Secondly, a lot of investors that I've spoken to would like to understand whether MACOM is the main driver for the more than 20% revenue growth that you expect this year. So how wide is the list of sort of drivers of that guidance? And I guess, related to that, my third question is, where you're placed right now? What do you think are the prospects of other majors coming forward to sign long-term supply agreements with IQE?

Thank you, John, and thank you for your continued support throughout the year. It's been such a great, again, support that we have felt from your side all the time. So again, thank you for your kind words. So going to your questions, standstill agreement with MACOM. Obviously, with the current, or with any kind of transaction like this and our market situation, we are a PLC. If MACOM wants to increase their position within IQE, they can do so via just the usual tools that are available. There's nothing that would prevent them to do that. So therefore, there is no standstill agreement in place. To your second question, is MACOM the main driver for growth that we are projecting. Again, we don't disclose revenue details. Ultimately, any kind of LTA agreement does give us visibility and transparency on demand and enables us to truly plan for capacity in the right way. And it is a driver of that growth, obviously, but we are not disclosing other levels of detail of who else could be engaged in that. But as you can see from our announcements, we are working on multiple fronts and not just relying on a sort of just one player alone, because we also need to mitigate our exposure to market fluctuations. And that actually goes into your third question on the LTAs. I think, the current market situation really lends itself very nicely to now engage with the -- and our position, obviously, as well, lends itself very nicely to now engage with other major players on LTAs as well, which would enable them to also secure capacity and supply into a very constrained market. So yes, we are working with on multiple fronts with multiple other partners to ensure that there is supply security and transparency when it comes to our demand.

[Operator Instructions] As there are currently no further questions over the phone. I would like to hand over for any webcast questions.

There's some questions on the webcast. Firstly, now the balance sheet constraints are less of a focus, where do you see the biggest remaining opportunities to drive operational improvements within IQE?

Thank you. So obviously, in 2025 was a clear reflection of our fixed cost structure that we have. So the biggest opportunity for us really is to increase the volumes and with that, increase our operational leverage. We've really been great at rightsizing the company and supporting the current volume projections that we have. Looking at our demand outlook, we were able to fully support that demand increase for '26, '27 and even the next year to come without significantly increasing our fixed cost base, which has obviously hurt us in 2025, but ultimately gives us a great opportunity to significantly increase our margin fall-through with higher volume to come.

Next question is, what is the status of transition from 6-inch to 8-inch wafers across the product lines?

Okay. When I first joined IQE, I was quite surprised actually that we had such a broad offering in different diameters for the market. Ultimately, any kind of transition to a different diameter, be it from 6 to 8 or from 4 to 6-inch is driven by customer demand and market requirements. So there's no one particular sort of drive to increase the diameter in particular. And we are monitoring very closely and working closely with our customers to reflect the demand accordingly.

There have been reports of indium phosphide shortages. Are you seeing this? And could this impact the company in the second half of the year?

Indium phosphide is a very sought-after commodity these days. And we are working closely with our suppliers to mitigate any kind of indium phosphide shortages that we are seeing. Ultimately, the main component here will be to dual source or to increase really our sourcing capabilities and ensuring that we are just not relying on one supplier alone and which will expose us even more. So we are monitoring that very closely together with the suppliers as well as our customers.

How close is IQE to garnering meaningful revenues from microLED collaborations?

MicroLED is going to be a significant growth driver as indicated in our future. We are not disclosing how much each of these technologies are contributing to our growth going forward. But as we have disclosed in the RNS, we are showing significant traction with various -- on various fronts with various partners on MicroLED technology.

When does IQE expect to hit capacity from current MOCVD equipment for indium phosphide and GaN -- and has already ordered any more machines for this use? Or are you planning to?

Capacity in the compound semiconductor space is a very variable thing. As mentioned, it depends also on the wafer diameter and the mixed technology mix that are run through those tools and tool platforms. Right now, we are not seeing any capacity constraints, as mentioned in our revenue outlook. However, we are working closely with our tool supplier partners to ensure that we have access to tools, if indeed those capacity increase demands would arise. But as mentioned also, those will have to come -- any kind of capacity expansion will have to come with customer commitments and a clear potentially even a co-funding situation with our customers.

It's noted that CapEx spend declined from GBP 11 million to GBP 6 million. Can you give some guidance on what CapEx spend looks like for 2026 and beyond?

The 2026 and beyond CapEx spend is limited right now to just purely maintaining our asset base. This is maintenance CapEx, which is always required to maintain our sites and assets throughout our locations. As previously mentioned, any kind of capacity increase or significantly other CapEx requirements will have to come with customer engagements, customer commitments and potentially even customer funding. There is a multitude of models that we can apply to that customer funding, which will allow us to flexibly get the funding for any kind of capacity expansion.

Does IQE expect to stay independent in the short to midterm as presumably the bottleneck in epi wafer production for indium phosphide must make you an attractive proposition.

As we are painfully aware, we went for the last 18 months. We went through a very detailed strategic review in which we checked and went through an assessment of a multitude of different models, obviously, we starting from the sale of Taiwan to also complete sale of the company. And ultimately, this now the result with this fund raise showed that staying independent is the best solution for IQE, and also creates the best value for our shareholders.

Will IQE ask customers to include the cost of future MOCVD machines in any long-term agreements?

Good question. And as I've mentioned before, any kind of capacity expansion will need to go through a business model with our customers. It can be done via an LTA for long-term agreements. It can be done via co-funding. It can even be handled through a consignment of tools. So there's different business models that we can apply. However, the main thing to point out, as I've mentioned earlier as well, is that any kind of capacity expansion or addition of tools will need to come with customer commitments on any kind of front.

Does IQE expect to make any further fundraises in the next 2 years? Or will the long-term agreement with MACOM help with this?

The long-term agreement definitely with MACOM helps on that front. Obviously, the fund raise in general is like for us really solves our debt problems and gives us ample headroom to realize the opportunities ahead of us and the significant growth that is projected. Ultimately, if we do have opportunities that would require additional funding, such as significant capacity increase. Those would need to come again with customer commitments or other funding opportunities, so that we currently do not foresee any additional fundraises in the future.

Do IQE expect to expand its margins? And are margins currently higher for indium phosphide and GaN over the traditional VCSEL wireless business?

Margins are always heavily, first of all, technology mix driven, but then also volume driven. As noted, we are extremely heavily fixed cost base. That means that any kind of volume increases fall through significantly on the bottom line. However, when you look at our ultimate product mix, wireless is usually seen as a more of a commodity product, which is really heavily dependent on the volumes to drive margins. So yes, a more mix weighted towards indium phosphide or GaN would definitely lead to additional margins. But again, this is also -- it's very difficult to just say that predicted like that as there is multiple and other levers really playing into that.

Are you still in the process of applying for chips funding in the U.S.A.?

We are still and have been engaging with governments in general on funding opportunities. I think, our situation now that we are in is a completely different position to have when it comes to these negotiations and really strengthen our position. So we will maintain that. And we will increase engagements on all fronts.

You spoke about the wireless business that saw improvement in second half '25 and first half of '26. Can this be sustained? And if so, what are the driving forces behind that?

The improvement in wireless was partially driven by market recovery that we are seeing inventory depletion and really just a catch-up on that. This has also been coupled with new design wins that we've seen and we've been able to realize across new technologies in the wireless segment. So it's a combination of things. But we do believe that, this is something that we can sustain over the years to come.

How quickly can you convert gallium arsenide production to indium phosphide?

Our tool set is flexible to some degree. So we can certainly transfer or convert capacity from one technology to the next. However, that kind of conversion would again need to be tied to discrete customer demand and visibility to that, because obviously, it does come with downtime of the tools and also CapEx commitments.

Thank you. And could you please clarify whether IQE is currently converting or is planning to convert any of its Taiwan manufacturing capacity to support 6-inch indium phosphide epitaxy? And if so, could you talk about how this fits into the company's longer term strategy for indium phosphide photonics and data center-related demand?

We are monitoring demand very closely. And as mentioned, we are converting capacities when and if and when that demand materializes. Ultimately, we are -- our geopolitical footprint enables us to flexibly react to different market situations and market demands. That also means that any kind of conversion would fit into -- would need to fit into the overall strategy that we have, depending on where we source certain technologies from.

Thank you very much, Jutta. That is all the questions from the webcast.

It seems there are no further questions over the phone. I'd like to hand the call back over to Jutta Meier for closing remarks.

Thank you for joining us for this call today. As mentioned, this is an extremely exciting day for IQE. The period of uncertainty is behind us. Our balance sheet has been strengthened. And we are well placed to benefit from increasing demand across our end markets. I appreciate all of your support throughout this time and look forward to celebrating these kind of successes going forward.

This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.